Virtual land value and digital real estate economics.

Virtual land ownership is a great promise from the metaverse, but how could we master virtual land revenues?

1. Land value depends on revenues.

Three distinct revenues: income, profit, and salary.

Adam Smith (1723 — 1790) and Robert Malthus (1766 — 1834) are the firsts to conceptualize land revenues between the late 18th and early 19th centuries when it slowly emerges from the natural and religious fatalism which pre-existed.

The roles to play in a metaverse economy

In a traditional economy, three different roles emerged due to historical, political, and economical reasons. Are we able to write a different scenario for virtual societies in a metaverse? Can we confidently consider that multi-tasking will be the rule in the decentralized web and that workers will be their own operators and owners? The experience of web2 makes it hardly believable as solopreneurs experience the complexity of doing it all by themselves, and web3 won’t self-organize in a better way. We will need to write down the smart contracts on incentives models that will lead web3 users into adopting the most profitable behavior for society at scale.

Distributed ownership at the core

One of the main reasons to decentralize land ownership in future metaverses is to avoid building a web3 economy that would depend on monopolistic actors like the web2 one. Malthus published an essay on land revenues in 1815 in which he considers the annual income of the owners at the core of its theory. This will dominate the political economy of Great Britain in the early 19th century when the legal framework for land revenues radically dissociates the rights of ownership and the rights of exploitation.
- The owners are “freeholders”. They benefit from a persistent right of ownership of the lands, transferred from one generation to another. They never intervene in land exploitation.
- The operators (farmers in the agricultural economy) are “leaseholders”. They own the exploitation, thus the rights of land use. For three generations or more, they can transfer these rights to their descendants. This strong security conceded to operators encourage investments in productive infrastructures.
- The tenants are simple users with an ordinary short-term rental title.
This organizational framework can be seen as a system of grants on lands, which had many benefits in Great Britain in the 19th century. It avoided a social revolution like the French had in 1789 resulting in a progressive dismantling of land properties and a random distribution of it. It resulted in three clearly distinct social classes each of them having its own role to play in the economy. It eased the investments in productive assets and stimulated the theorists to bring an in-depth analysis of land revenues.

2. Land value depends on location

The land value depends on a capacity to generate revenues, which in the physical world was closely related to a location in space. Indeed valuing lands means answering the following three questions:
- How to define the position of some land in space?
- How to calculate the relationship between revenues and land location?
- How to calculate the relationship between revenues and activities’ location?

Land revenues and transportation costs

Von Thunen stated in 1826 that the land value was depending on its position in relation to the marketplace, usually at the center of traditional cities. The distance between the land and the marketplace influences transportation costs and access to trading opportunities, which explains the land revenue through its position in space. The more the land is close to the marketplace, the best revenues, though the higher value. The best-located lands collect an excess of revenues which is equal to the saving on transportation. The counterparty of this perspective is that the distance to the marketplace fixes the price of goods, which needs to be high enough to cover the transportation costs on top of the production costs. When there are multiple marketplaces in an urban area, the value of land is balanced towards its distance to all accessible marketplaces. Accordingly, Von Thunen defines the owner’s income as the excess of revenue collected by central lands compared to peripheral ones. This definition assumes that:
- the price of goods is the same for all, thus one land value is based on the difference in revenues compared to another land.
- the analysis of revenues considers the total value of the production.
- revenues are calculated from the remainder after payment of production and transportation costs.
- the owner and the operator are separated, and the owner’s income is the annual rent of the land, while the operator is the one paying the rent and the transportation costs.
In Von Thunen’s perspective, the owner’s benefit is opposed to the benefit of all the others. Population growth will increase the price of goods due to an augmentation in demand, and the increase in the number of lands to cultivate to feed the people will increase the transportation costs of production. In such a scenario, the land owner is the only beneficiary while the population of consumers, the worker, and the operator have to support higher prices due to higher transportation costs.

Land revenues and the competition for land use

The competition for land use is intertwined with land rarity. As much as lands with similar attributes are available, there is no competition to use them. As soon as some combination of land attributes becomes rare to find, particularly the location in space, it results in competition between operators to use it. While the owners look for maximization of their income, the land users compete against each other to get the use of the most profitable land.

Land revenues and the economical environment

Marshall proposes another definition of land location that is not only the distance from a central point in the city but rather a balance between the spatial features in an economical environment. He adds consistency to the relationships between land income, positional annuity, revenue, and profit, by considering an uninterrupted continuum including the natural properties of the land, the technical improvement of value extraction, and the excess profit made by capital investment. To understand Marshall’s analysis of land revenues, it’s necessary to bring a temporal perspective and consider different lengths of terms: short, medium, and long terms, but also continuity and discontinuity between periods of time.

3. The specificities of urban areas.

The consideration of the economical environment in the valuation of lands has been pursued by the neo-classic authors of the 20th century, who will definitely think of land values in terms of global economic balance. For them, all goods and services traded on the markets are generating prices that tend to a stable equilibrium, due first to the competition between producers and their interdependencies, second to an optimal allocation of production factors. Thus land revenues are simplified to a price of rent useful to the production, and temporary excess of income for an owner will rapidly be wiped out by the competition. In urban areas, customers are spread across space and their moves are limited. The land revenues will depend on the use that’s being made depending on the needs of the population. Different use has been studied by different authors:
- Land revenues depend on the retailing capacity
- Land revenues from the housing production
- Land revenues are being disintegrated

Land revenues depend on the retailing capacity

Edward Chamberlin (1899 — 1967) was one of the first to question the hypotheses of full competition between economic agents. He analyzed in particular the phenomenon of increasing differentiation between products to explain how commercial urban land revenues can be assimilated into monopolies. He does not consider housing nor industrial use in his theory but differentiates revenues of retail products from agricultural products. According to Chamberlin, all land can equally generate the same maximum revenue since there is no natural fertility of the soil engaged. Consequently, there is no rarity of the “best” lands for purely commercial businesses. While the agricultural land gives more or fewer revenues if it is closer or farther from the selling market, the urban land hosts its own market on itself, and its revenue depends on its size and nature. An urban land revenue will scale up or down according to the land’s retailing capacity, and the convenience of the retail store results in a differentiation of the product within space. Because the buyers can’t move freely, each product in a specific location will be adapted to this specific group of customers. And because the seller of each location has a uniquely personified product to match the expectations of a specific group of customers, it is considered a monopoly on this specific product. Consequently, the operator will pay full price to the owner for not being replaced by one competitor luring the same monopoly position.

Land revenues from the housing production

Alain Lipietz (1947 — ) studied land revenues as a political fact instead of an economic one. In his thesis published in 1974, he considers land value as a price drawn by land ownership in the process of a capitalistic production of housing units. To support this perspective, he drops the idea of a yearly annuity in exchange for any technic or economic attributes but instead defines land prices as exclusively social and dependent on the capitalistic model of production. In his theory, the space is modeled by dominant classes, which need to allocate the workers and the productive infrastructure, including agricultural production, here and there. This supposedly result in segregated spaces: wealthy residential areas on one side and proletarian housing on another side. Factories, offices, houses, landlords, engineers, and workers, will be attributed their spaces in the urban area, which will at the same time order the distribution of land revenues to the social class of the owners. The boundaries of each space are set by a combination of physical infrastructures (roads, buildings…) and administrative rules. As a result, all cities tend to be organized similarly: department stores and offices in the center, industrial facilities in the surrounding of it, and housing units are moved from the center to the peripheral due to the development of cars. In short, urban spaces are classified accordingly to the most convenient use for the capital, and this tendency is seen as increased in new cities or new politics of urban planning applied to older cities. For each land, Lipietz raises the question “which capitalist activity needs it?”. He answers: in the countryside the agriculture, in the urban areas, the production of houses and buildings. The activities developed in the buildings will depend on the importance of their location, and the only priority overpassing the need for housing units is the one for special tertiary and commercial use.

4. Land Socialization and taxation

Tax on gains in land value

We’re back in time, as Stuart Mill (1806–1873) proposed already in 1848 a taxation on the gains in land value to balance the increase of such revenues. As he says, the only reason why the owners are getting revenues from their land is that it is a need for many to use it and it can’t be done without their consent. But the fundamental principle of property is to give every individual the capacity to own what they produced from their work and to store up accumulated savings. Yet this isn’t the case with such gains in land value. Any revenue that tends to grow constantly without any effort from the owners, could be taxed by the state with respect to the principles of private property. The state would collect some or all of the growth in wealth as if it belonged to no one, in order to redistribute to society the gains in value that result from society progress. Because landowners might have paid a price to earn some land in the prediction that it won’t be taxed in the future, retroactive rules wouldn’t be fair. But what’s the hurt if the state decides that all further land ownership will be applied taxation on the added value at the re-sale? This could even be stated for current ownership: an evaluation of all lands of the country will be made on time T and the sale of any land will see gains on value at times T+1 or T+2 taxed. Taxation on gains in value could even be fair to owners since the state will assure them that the current value of their properties won’t be taxed in the future. In short Stuart Mill defines taxation on added land revenues not much like a tax but more like a debit of what has never been owned by anyone. When the owner invests some capital to increase land production, it will generate added profits that aren’t subject to taxation. The contrary would result in owners stopping their investing in property improvement and have a negative effect on society. The author is also opposed to the nationalization of lands. Stuart Mill worries that giving the monopoly of land ownership to the state would result in public servants setting up the price of rent arbitrarily and have negative effects on society at scale.

Decentralizing land ownership?

The socialization of lands is another solution to the bad sides of centralized ownership that is different but not incompatible with taxation. It consists in sharing land ownership across the population. As for Philippe Lamour (1903–1992), the definition of ownership should consider not only the right to own but also the social function exerted by ownership. Edgard Pisani (1918 — 2016) brings up other arguments: in terms of environmental sustainability, humans need a relationship with the land they live on, and this relationship can be threatened by predatory owners. On another note, the lucrativeness of land ownership redirects the savings of the people into sleeping speculative assets instead of investing in productive infrastructure. Pisani proposed in his book “Land utopia” published in 1977 a global decentralized ledger on land ownership. (Ed. It sounds pretty close to a blockchain solution, doesn’t it?) The land ledger should list each location, size, description of activities and buildings, and the identity of the owner for all plots of land owned on the national territory. The data on land will be available in two formats: one file per land, and one file per registered owner, listing all its properties. The ledger would support the activities of land registry offices spread across the country, with the mission to collect information on local lands and make it available to any user from any office. The offices will also be in charge of managing public properties, acquiring unoccupied lands, transacting public buys and sales, and stocking lands for further public use. Their activities will be funded by land taxation. The mission of the offices would be to control the centralization of land ownership and redistribute to households the opportunities for becoming an owner. Indeed, house ownership is considered a priority right with social utility serving the common good: no state could expect from its population that it invests its savings in productive assets if it can’t guarantee them the freedom of owning their houses. And that’s why societies should theoretically tend to an inevitable process of growing socialization of lands, following the population growth in metaverses’ demography.

--

--

Urban Developer & Scientist, founder @LandMinis3 // Machine Learning, Tokenized Real Estate

Love podcasts or audiobooks? Learn on the go with our new app.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Julien Carbonnell

Julien Carbonnell

351 Followers

Urban Developer & Scientist, founder @LandMinis3 // Machine Learning, Tokenized Real Estate